The war for the public cloud is claiming its victims

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Latest news about telecommunication companies and their struggle against giant cloud service providers show how the war for the public cloud is at its peak, and we are starting to see the first victims.

Some news

The war for the supremacy in the public cloud has always been dramatic. Since almost 10 years (can you believe it was ten years ago by now when in 2006 AWS launched its first service, S3?) new and existing players have jumped into the scene, to try and conquer this market, or at least to have a piece of the cake. Regular telecommunication companies, new cloud providers, companies working in IT but on different markets, all jumped into this new exciting business.

Some left pretty soon, but so far the results have been good for many who stayed: the so called TAM (total addressable market, in short how many customers you can potentially sell your solutions or services if you would be the only supplier) for cloud services is so huge that there was a place for everyone. I said “was”, because lately things are starting to change, and we can see the first results in some of the latest article I’ve read around:

Then, you have this other news from VMware:

VMware Says Newer Products Selling Well, But Weak Guidance Spooks Investors In Q4 Earnings

The leader in the virtualization market launched years ago vCloud Director to offer a IaaS management platform to its many service providers. Later, VMware decided to jump into this market with its own public cloud service, what is now called vCloud Air, using the same vCloud Director software sold to providers. There have been comments and discussions about this collaboration/competition between VMware and its Service Providers, but it’s not the topic of today.

What’s happening?

The news is that all these different players in the public cloud space are basically giving up in their war against the giant service provider. Telco are dismissing their cloud services, and seems like VMware will not expand vCloud Air anymore, and will mainly rely on its service providers.

So, who’s winning? Well, the usual suspects: Amazon AWS, Microsoft Azure, Google, Facebook (even if the last one is on a different type of business). They are constantly increasing their revenues, their margins, their size, while the offering to the customers gets new options every day, and at a lower price.

Look at Amazon latest financial results. Some of the so called “experts” are still surprised to see how much margin AWS can do with its services, and they were all speculating losses. How wrong they were: AWS is close to 10B Billions run rate (it means their revenues for the last quarter are 2.5B) and 30% of profitability (read all the numbers here: Amazon Shares Dive After Q4 Earnings, But AWS Is An Increasingly Fine-Tuned Profit Machine). Sales grew by 69 percent year over year. With margins climbing to 28.5 percent, AWS delivered $687 million in profit. Operating margins have successively climbed from 21.4 percent in the second quarter to 25 percent in the third quarter, to the current 28.5 percent.

And another insane number to understand the size of AWS: Amazon laid out about $9 billion in 2015 to pay for its cloud infrastructure. How much you pay each year for your datacenter?

If you want to learn even more on the latest AWS results, and some analysis of possible future growth, read here: How Long Can AWS Keep Climbing Its Steep Growth Curve?

Is there a lesson here? In my very humble opinion yes. And it’s the same lesson that probably competitors are learning the hard way.

Simply said, you cannot compete anymore, at this stage, with these giants by simply doing a “me too”. They are growing at such a pace that trying to catch up is impossible. Their massive size means they literally own their supply chain: they can get unbeatable prices for any hardware gear they need, and 99.99% of the time this hardware is custom-designed for their specific needs. This means that their acquisition costs are falling dramatically, and that’s one of the reasons they can keep adding services and lower prices at the same time.

If you want to start a new business that is exactly like them, you need to catch up, but this means investing Billions of dollars just to reach them. But since they are not slowing down to wait for you, there is a risk that all this insane effort would maybe bring you to the size they are today, but in two years. Meanwhile, they will be ahead again.

I said one of the reason is the economy of scale they have. The other reason I see is their business model: what all these giant cloud providers have in common is the (almost) complete lack of any sales chain. Yes, you can become an AWS reseller, yes you can resell Office365 or Azure, but they don’t really care if a customer buys their services from you or directly via their web portals.

Don’t fight on price and size

If you cannot beat them on price or size, how can you survive and be successful in this market?

You need to do something different.

For many this would probably sound obvious. But the fact itself that many competitors are giving up, means that they tried first. Not that there’s nothing wrong in trying and failing, but maybe you can start in a better way from the beginning and avoid to repeat the same mistakes.

Two ideas:

Aim for Quality: you should be a “boutique” service providers. Focus on quality, focus on those services that you know you can do at your best, focus on levels of service. Quality often wins, especially in the long run.

Be human: the incredible size of these giant service providers means that each single customer is just a bit more than a number, or maybe not even that. Unless the customer itself is a big enterprise that can have a discussion with the cloud provider at the same level, there are little chances that the giant will care more than what’s needed by the single customer. Don’t get me wrong, the quality of AWS, Azure and others is really good, but sometimes customers miss the feeling of being “special”. This is where competitors can win: if you are great in healthcare, build services exactly like those companies need, with proper certifications and so on. If all your datacenters are in a certain region, go and serve that community, by understanding what their specific needs are. Build a sales team with proper account managers that go out and talk with customers on a constant base, that listen to them and their needs, so that even without any commit (in a pay as you go model anyone can resign from a service at any time), your customers will stick to you.

I loved this quote I’ve read in one of the linked articles:

“The promise of public cloud is fantastic and will always have a place, but there are lot of workloads that don’t belong in the public cloud and require a lot more handholding that what a company can expect to get from an Amazon or a Google”

I’ve not bought my wedding dress in a chain store, I went to a tailor. I buy meat from a local butcher, I have dinner in a fine restaurant and not at a fast food. I love quality, and you’ll be surprised how many others are willing to pay a little more, if they understand the value of what you are offering.